Bank of America Says Extreme Optimism Triggers Sell Signal
Bank of America strategist Michael Hartnett's team reports that the Bull & Bear indicator has risen to 9.7, the highest level since 2021.
This reading triggers a contrarian sell signal, reflecting extreme optimism among investors.
Hartnett recommends tactically retreating from risk assets and shifting to defensive assets, duration assets, and the dollar.
Strategically, they maintain a long-term overweight position in stocks and an underweight position in bonds.
The credit market shows early warnings, with credit spreads for AI hyperscale data center operators and CDS continuing to widen.
Mechanically, extreme long positions are driving short-term capital outflows from risk assets, putting pressure on defensive sectors and benefiting the dollar, while event-driven rotations intensify market volatility.
Previously, this indicator has often corresponded with short-term pullbacks after reaching high levels.
Source: Public Information
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Michael Hartnett has long led Bank of America's Flow Show report, previously issuing contrarian signals during extreme sentiment, with significant market adjustments following highs in 2021.
The capital path is to guide institutions to reduce short-term risk exposure through sentiment indicators, motivated by the desire to avoid passive deleveraging from overly crowded positions under policy or credit shocks.
Similar to Bank of America's multiple Bull & Bear high sell signals in 2021 and 2025 followed by phase pullbacks, the current phase is driven by sentiment rotation rather than fundamental collapse.
Essentially, this represents a transfer of pricing power, shifting from sentiment-driven risk appetite to defensive and duration assets, with the mechanism being that extreme positions themselves become a source of market vulnerability.
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